advice required: sub div deal colapsing?

[grodgersoz]

Hi everyone, i may have hit a hurdle here and would love your input.

I am currently looking at a buying a new IP in regional NSW. I own 2 properties (1 x oo, 1 x ip) and this would be my 3rd. I have never done a subdivision or DA before but want to get started and this will (hopefully) be the first of many.

The site is a corner block, sloping towards the street so no issues with easements. It is about 870sq/m in a rectangular shape with an existing 2 bed 1 bath house (approx 80 yrs old) on the front corner leaving a great big backyard.
The interior has not been updated in anout 40yrs so is well and truely ready for a reno. My plan is to install new kitchen, new bathroom vanity, give it a lick of paint and some new carpet, but otherwise just repair jobs, nothing major/structural. I have completed a reno similar to this before and estimate it will cost about 10-15k (doing all the work myself). once the reno is complete, i should be able to rent it out for about $200/w. Its not a great rental return, being $200/w on a total cost of $220k (purch price and reno and thats not including stamp duty etc) but the potential for the DA will more than make up for that.

i have already paid a local town planner to assess the site and do a little research for me based on keeping the existing dwelling and sub dividing the backyard.

He has said i should be able to fit two 2 bedroom duplex on the back block, but we have not discussed what could be done if we demolish the existing dwelling.
the reason i never asked about that scenario is that i think i will only have enough finance to complete the two new buildings, not the demolition and construction of another 1 or 2 more. My gut feeling though is that if it were demolished, i could fit 4 units/townhouses on it.

i have recieved back my building and pest inspections. Pest inspection: no problems.
building inspection: some concerns.

View attachment summary.doc

i have attached a summary of the parts of the building report im a bit worried about. I think that the shed (which is very small) could either stay but the tennant wouldnt be able to use it, or i would get it removed BUT it is made partially of asbestos
i have not had any dealings with removing asbestos before, is it costly? or should i just leave the shed where it is?
also, there is some rotting to some of the exterior walls mostly around the base of the building, but it doesnt seem too bad.
the roof would require a repair, but im not sure how badly or how much that would cost.

I believe it is a great site with potential (5 blocks from the CBD, in a good area, flat land, easy to work on, lots of other subdivision going on in the same area) but what im trying to decide atm is this:
do i go ahead and repair the current place plus then attempt my first subdivision followed by building a duplex? (original plan)
or
do i, based on the new info from the building report, (which painted a worse picture than i thought) try to do some sort of joint venture as i dont have the funds to demolish the lot and build 3-4 units/ try to pass it off to a developer that can and ask for a finders fee/ some other idea?

lastly, to help round out the picture, my finance position is that i have 95k in a LOC, the purch price has been negotiated down to 206k (from 240k) but i dont have a high income so my main restriction is going to be the income barrier.

any questions, please fire away as im an open book, otherwise, have at it with your hints, tips, advice or general comments.

regards
greg

 

[mary&mat]

Hi Greg,

How much would the original place rent out for if you didn't make any improvements to it?

Can you afford the holding costs if/when you demolish to rebuild 2 at the back?

Regards,
M&M

 

[rexilla99]

Hi Greg,

It really depends how much you buy the block for and the local plans requirements for the area. Ask the private town planner or an architect on his thoughts and if he is experience ( should not cost anything for preliminary advice), he will be able to to advise what can developed on there. For example I am managing a property that is 765m2 with the intention to build 5 x townhouses.

With corner block you have a great advantage if 4 x townhouses can be developed as each will have it own street access and will be worth more compared to having dwelling built behind each other.

Go for a drive around there area and look for similar sized blocks to see what has been built, this will give you an idea of where the boundaries can be pushed.

Check to see if the house can be demolish as there is no heritage protection or road widening issues.

Jason

 

[grodgersoz]

maryandmat:
Without improvements, i believe i could rent it out for about $160/w.
my original plan was to buy, reno and rent it out, then subdivide and build the two units on the back (or duplex). i have calculated that i have enough funds to do this. my holding costs would be minimal as the improved (after reno) rent would be not too far off the interest repayments.

however, if i demolish and then try to build the 3 or 4 units, i dont think i will be able to afford the holding costs.

rexilla:
i just had another chat with the town planner, he has advised that 3 units are no worries but he feels that 4 would be about a 50/50 chance at council.

i cant drive around the area unfortunately as i live in melbourne and am buying site unseen, although i have had a look on google street view and google maps. there are a few similar projects going on/completed in the area, but they look like they are also allowing for the size of construction etc that would be similar to my 3 units, not 4

as for demolition, i have checked and its fine to be buldozed. no heritage issues.


I have recently been told that it is possible to sell off ideas like this one for a finders fee to developers. although id rather do it myself, i dont have the finance to, so, has anyone got any experience in doing that? or do they know any developers i can speak to about that? etc...

 

[Fourex]

I think it would depend on what you want out of the deal at the end.

Do you want to make a quick profit? Do you want to build and hold?

I think I would do the following providing their would be enough profit in the end to warrant the hassle.

Negotiate a discount on the asking price based on the condition report.

Do the minimum repairs required and rent asap while putting in the subdivision application.

Once approved sell off the original dwelling on the new lot after a quick reno.

Build the duplex and either hold or strata title and sell off.

Being your first I would reduce the risk by keeping the original house for income coming in and if the D.A. fails or a change of circumstances change.

A number of things which is unknown at present and you won't know until you put in your application could put pressure on you down the track. After your fiirst dealings with council you will have a better idea of timelines, hidden fees (council contributions charges, application fees, headwork charges) as well as the approval time. Notch up one on your belt then go for the demo job and 5 unit development on the next one if you feel confident enough at the time to do.

Also what will be your plan if the application is not approved?

My 2 cents.

Cheers,

Fourex.

 

[.toe]

Hi Greg, I would've thought that if you've never done a subdivision or a DA before then adding a Joint Venture to the package is just another layer of complexity. I wouldn't be too tempted to overstep, just to get a deal across the line. The better your early deals are, the easier it'll be to continue. I'd want a healthy profit at each stage.

How much more are you paying than the value of the land? That will be the cost to you of dozing the house, which I would guess is a fair cost for a first project, but much easier for a more advanced developer to absorb.

You've said that the reno will add 25% to the rent for an added 7.3% in capital. Do you have a post reno valuation figure, would it also add 25% value? 3:1 ratio for the reno is the least you should accept I would've said, given that you are relying on leveraging this gain to build. And that it includes the value of your work.

How reliable is your $15k reno budget now that the building inspection has shown these issues? The builder who did the report should be able to estimate the cost of these repairs on paper (as if he is doing the repairs, regardless if you are doing them). If the estimates are high and the hurt your reno profits, show them to the vendor and renegotiate harder. Remember no-one else will come along and make an offer without an inspection on this property, the vendor knows this also, and they now know the extent of these problems.

Also ask the builder if he thinks a handy man could carry out these repairs and any advice on how to do the tricky stuff. Add the cost of the repairs that require a tradesman into your calcs.

I think that at your stage your objective should be to add every bit of value you can. I'd try to make it fly by renegotiate, renovate, tenant, reval, subdivide, reval, build the block, reval. Then either doze when you have plenty of equity in it, or even look at a more extensive reno, just how much rent could you sqeaze if you added decking, entertainment area, blah blah, and can you refinished the house so it looks nearly as new as the units, rather than dozing? That's a bigger reno, but cheaper than dozing/building.

 

[propertyVIC]

Another option would be to reno cheaply, subdivide, sell 'done' property then build on the back yard... and keep the back duplex or whatever you end up with.

 

[Nathan]

Leave the front and rent it.

Build out the back. Rent out the back, then worry about what do do at the front later.

What town NSW is it?

 

[NBS]

What Nathan said was what I was about to say.

Do you have to do anything to the existing place? or just rent it at $160 a week.

Build the duplex / townhouses out the back revalue maybe sell one, keep one or sell both, rent both.

Hold the existing house till your ready to do the front as your still getting $160.00 a week. You may even do a small reno on the place once the back buildings are completed and get your $200 a week, this I figure will depend on how long you feel you will wait to develop the existing house.

Not much point doing a $10 - 15000 reno if going to pull down in 6mths so to speak.

Brian

 

[grodgersoz]

thank you everyone for all your input and ideas, i trust you have all been having a great and safe Xmas with family and friends.

My ideal plan is to hold all properties after construction and rent them out, although if (for whatever financial reason) i have to sell one or two of them, i will.

I am about to restart price negotiations with the vendor based on the condition of the building report. I have contacted the building inspector to ask about estimated repair costs, but they are closed until the 10th of jan. So until then, can anyone offer advice as to how they have/would approach this renegotiation scenario?
Should i show them the building report or just tell them what it says? i cant think of any advantage to hiding it from them.

I am having a little bit of trouble calculating the value of the land. i know ROUGHLY what it is worth, the reason its causing a bit of trouble though is that there are no other blocks of vacant land to compare to in the area. im about 5 blocks from the CBD, the other closest blocks are a fair bit further out in new estate, so hard to compare. I would like to try and nail it down a bit more so i have a more solid figure to work with as a base price im willing to pay if im going to doze the front place at some stage (its not certain i'll doze it, i might just sell it later as per fourex or propertyVIC's idea). Thoughts anyone?

I am confident of my $10-15k reno budget, but that was for an internal reno only. I am less certain of the costs to repair the external but have had my dad (who does house renos) have a quick look, and he estimates about $25k for the structural repairs alone.
I dont believe that i would gain that back in growth/equity so i think the structural repairs are now out of the question.

so, based on all of your ideas, im now thinking, renegotiate a cheaper price (thinking i want to pay closer to $180-190k), rent it out in its current condition, subdivide, revalue, build a duplex/2 units and keep them, then sell or doze the front old house.

The REA has informed me (who knows if he is lying...) that the vendor has already knocked back offers of $180-190k, but that was about 6 months ago. perhaps he is starting to get desperate and will reconsider them? The vendor is an elderly recently widowed gentleman who has said he MIGHT consider staying on as a tenant, but wont be held to that idea.

looking forward to your next round of feedback.
Happy new years!

 

[.toe]

If your best advice so far is 25k for repairs I'd seriously think about waiting for the builders estimate. You'll want a serious reduction for that, and you might get it if you show them a builders quote to repair.

 

[Fourex]

I normally go about getting a discount based on the inspection report by the following:

Get an estimate on any repairs required (especially structural ones) you would consider you did not know about at the time of the first offer.

Optain an estimate from a third party written quote would be best but verbal is still good.

Go back to the agent and advise you would like them to either:

Reduce the price to take into account the work required.

Have them perform the work to a standard a third party builder will sign off on with no discount.

I normally find they do not want the hassle of trying to or sort out the work themselves and will discuss the discount but this way you look like you are giving them an option rather than hitting them up for a discount which is what you really want.

If you are happy with the price buy, if you do not think the discount will be worth it walk away (you will need to show that you are prepared to walk away).

I would not give a copy of the report away, it is your report which you paid for if they want a copy they should go half in the cost with you otherwise I do not give out copies. If however they need to sight the report to back up your arguement then I would let them sight it. Keep in mind the agent is not a builder so hold firm on any advice the builders give you on costs involved.

I would not worry about trying to keep the owner on side either so he stays on to rent the property. You will find a tenant easy enough and will be less stress having the hassle in my opinon on working with the old owner when you go to carve up his yard and hopefully make of profit on what he watches you build in his old backyard.

I also have a lot of conditions in the lease contract for the rental to allow you access while you get your D.A. into council and for when the builders start to build on the land (assuming you rent out the current house).

Good luck, and keep in mind their are plenty of deals out their if this one falls over.

I am a fan of your concept and there are plenty of houses out their you can put it into practice with and make money on when you start looking (providing you buy well).

Cheers,

Fourex.

 

[grodgersoz]

Fourex

thank you for your great reply, the end result was that the deal fell over. I believe the owner is holding out for someone who DOESNT do a building inspection and buys it not knowing the full extent of the internal rot.

as a result, we could not come to an agreement on the price (by quite a long way)

so, its on to the next deal! I'll keep my eyes open and bear your advice in mind for future deals as well.

thank you again.